Expert Opinion & Commentary How to use life insurance in your estate planning strategy Written by Barry Flagg Reviewed by Nupur Gambhir Nupur Gambhir Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service. Posted on: October 9, 2024 Why you can trust Insure.com Quality Verified At Insure.com, we are committed to providing the timely, accurate and expert information consumers need to make smart insurance decisions. All our content is written and reviewed by industry professionals and insurance experts. Our team carefully vets our rate data to ensure we only provide reliable and up-to-date insurance pricing. We follow the highest editorial standards. Our content is based solely on objective research and data gathering. We maintain strict editorial independence to ensure unbiased coverage of the insurance industry. Life insurance plays a crucial role in estate planning for high-net-worth individuals by offering financial security and tax advantages. When structured correctly, it can provide a tax-free death benefit to heirs, covering estate taxes and preserving the value of the estate. Additionally, life insurance policies within trusts allow for wealth transfer outside of the taxable estate, ensuring that loved ones receive the full benefit while minimizing potential tax liabilities. This approach not only protects wealth but also ensures a smoother transition of assets to future generations. To explore the benefits of using life insurance as a part of your estate planning strategy, we spoke to Barry Flagg, president and founder of Veralytic, an independent life insurance research company What follows is a lightly edited version of our conversation. Insure.com: How can life insurance be used to minimize estate taxes for high-net-worth individuals? Flagg: Estate taxes, also known as transfer taxes, are due on the inheritance of assets bequeathed at death. These taxes can reach up to 40% of the asset’s value (in addition to any income taxes owed on income generated by that asset) and apply to all assets owned at the time of death, but only on the value exceeding a specified lifetime exemption amount. For deaths in 2024, the lifetime exemption is $13,610,000, or $27,220,000 for married couples, with an adjustment for inflation set for 2025. However, these exemption amounts are scheduled to expire at the end of 2025, reverting to the previous exemption levels of $7,000,000 for individuals and $14,000,000 for couples, also indexed for inflation. Gifting assets during your lifetime can help minimize estate taxes by reducing the value of assets owned at the time of death, but gifts are also a transfer that can be taxable. For instance, gifts exceeding the annual exclusion amount are subject to gift tax rates that can also reach up to 40% of the gift’s value – in addition to any income taxes on income generated by that asset. In 2024, the annual exclusion amount is $18,000 per individual, adjusted for inflation. This means that gifting alone may not significantly reduce the impact of transfer taxes on future family wealth unless relatively small lifetime gifts can be leveraged into much larger amounts payable at death. These limitations on estate and gift taxes make life insurance an effective tool for minimizing estate taxes. When a trust owns a life insurance policy, it is not included in your taxable estate at death, because you don’t own the policy. Additionally, premiums can be structured to fall within the annual gift tax exclusion, and the much larger death benefit can be used to pay the estate taxes owed on the remaining taxable estate. Insure.com: How can life insurance trusts help in maximizing tax benefits for beneficiaries? Flagg: Life insurance trusts, specificallly irrevocable life insurance trusts (ILITs) and the more modern actively-managed life insurance trusts (AMLITs), are powerful tools for maximizing tax benefits for beneficiaries by covering estate taxes owed on assets remaining in the taxable estate, thereby minimizing the impact of estate taxes on beneficiaries. When an affluent individual passes away, the life insurance death benefit is paid to the trust. Because the trust is irrevocable, these proceeds are not included in the taxable estate, and since life insurance payouts are tax-free, they provide financial security to beneficiaries without any tax burden. Additionally, life insurance trusts offer the security of professional custodianship with ILITs and professional management with AMLITs. Insure.com: How does life insurance fit into a comprehensive plan to maximize tax benefits and protect assets for future generations? Flagg: Life insurance provides tax-free — and often estate-tax-free — cash upon the death of an insured. In most cases, it’s used by working families to protect against a loss of income of a breadwinner, and pay off debts. These can include mortgages and final burial expenses, estate taxes, pension and deferred compensation benefits, and other liabilities. In addition, for higher income earners in higher tax brackets or policyholders with a higher investment risk tolerance, life insurance can also be used as a tax-favored long-term investment vehicle, particularly when cost of insurance charges are already being paid for the death benefit. Using life insurance as a tax-advantaged long-term investment can maximize benefits by eliminating taxes on annual growth within the policy account, distributions from the policy, and the transfer of wealth to future generations. However, as with any wealth accumulation strategy, the lower the costs and the stronger the performance track record, the greater the potential for building and transferring wealth. Conversely, while life insurance can be a tax-favored long-term vehicle for wealth accumulation, a life insurance policy with high internal costs or a track record for poor performance is unlikely to provide any advantage over taxable vehicles, even given the tax-preferences, and could even result in an erosion of wealth relative to other vehicles. As my father used to say: “Don’t let the tax tail wag the economic dog.” Make sure you’re getting advice on how your policy’s internal costs compare to industry standards (not just hypothetical premiums) and how realistic the performance expectations are compared to the actual historical performance of relevant asset classes (not just claimed or hypothetical assumptions), then ask your financial advisor for a Veralytic report, or click here to be connected with a Veralytic Advisor near you. Barry FlaggExpert Advisor  . .Barry D. Flagg is the inventor and founder of Veralytic®, the leading online publisher of life insurance pricing and performance research and product competitiveness ratings. Veralytic is the result of his unique background in both the fiduciary investment business where he became the now oldest, youngest Certified Financial Planner (CFP®) in history, and as a life insurance expert consistently recognized in the top 1% of the industry. He’s renowned for applying Prudent Investor Principles to life insurance product selection or retention and portfolio management. As a result, he serves as sub-advisor to thousands of irrevocable life insurance trusts (ILITs) as well as RIAs and wealth managers, is a regular contributor to Forbes for articles about life insurance, leads curriculum development and instruction for Applied Fiduciary Practices involving life insurance for The Center of Board Certified Fiduciaries at Wake Forest University, and serves as a volunteer to the CFP Board Professional Standards and Legal Department for complaints involving life insurance. Barry has authored numerous articles for national publications on managing life insurance as an asset according to established and proven asset management principles and frequently teaches continuing education courses about the same to attorneys, CFP®s, CPAs, and CTFAs. Disclaimer: The opinions expressed by outside experts in Insure.com’s “Expert Opinion & Commentary” section reflect those of the author and do not necessarily reflect the views of Insure.com, its parent company QuinStreet Inc. or any of its affiliates and employees. Our editors review these articles and monitor them for accuracy after they've been posted, but the insurance industry sees constant rate changes, regulatory shifts, and other changes. Readers should always check an insurance company's website or contact.